New Judicial Interpretation on Labor Disputes Issued by the Supreme People’s Court

In response to emerging legal challenges—particularly regarding non-compete clauses, employee benefits, and social insurance—the Supreme People’s Court released the “Interpretation of the Supreme People’s Court on Issues Concerning the Application of Law in the Trial of Labor Dispute Cases (II)” (最高人民法院关于审理劳动争议案件适用法律问题的解释（二）, “Interpretation (II)”) on July 31, 2025, which will take effect on September 1, 2025.

This new interpretation replaces and updates several prior provisions, including the repeal of Article 32(1) of Interpretation (I), and aims to unify judicial standards in light of evolving employment practices.

Below are some key highlights from Interpretation (II), along with our initial observations.

I. Clarification of the Meaning of “Entering into Two Consecutive Fixed-term Contracts”

Article 10 clarifies when two consecutive fixed-term employment contracts are considered to have been entered into under Article 14.2(3) of the PRC Employment Contract Law (“ECL”). This matters because, once the condition is met, the employee has the right to request an open-ended (non-fixed term) contract after the second fixed-term contract ends. The employer must agree to this request unless there are legal grounds for termination under Articles 39 or 40(1) and (2) of the ECL.

One key scenario that has drawn attention is when an employer and employee agree to extend the first fixed-term contract for a total period of one year or more. If this extended period expires, it may be treated as two consecutive contracts, triggering the employee’s right to request an open-ended contract.

Previously, local courts and regulations in places like Beijing, Jiangsu, and Shenzhen had their own rules:

• Beijing: If the first fix-term contract is extended, it is considered two consecutive contracts once the extension ends.
• Jiangsu and Shenzhen: If the total extension exceeds six months, it counts as a renewal.

Now, Interpretation (II) establishes a national standard: if the total extension period is less than one year, it does not count as two consecutive contracts. This provides employers with more flexibility, allowing them to extend a contract for up to one year without triggering the obligation to offer an open-ended contract.

Practical Tips for Employers:

If the company is uncertain about continuing an employee’s contract, it can negotiate a short-term extension—ensuring that the total extension is less than one year. This approach allows the company to retain the option to end the contract upon expiration without being required to offer an open-ended arrangement.

II. Continued Employment Following Contract Expiration

Article 11 states that if an employee continues working after their employment contract expires, and the employer does not object within one month, the law assumes the employer agrees to continue the employment. Specifically,

• If the employee requests to renew the contract under the same terms, the court will support it.
• If the employee qualifies for an open-ended contract and requests one, the court will also support that.
• If the employer attempts to terminate the contract without legal grounds, the employee can claim unfair dismissal, and the employer may face legal consequences.

Based on the above:

• After the first fixed-term contract ends:
  • The employer has a one-month grace period to legally end the contract.
  • If the employer does not act within that month, the employee can request to renew the contract under the same terms.
  • The employer loses the right to terminate based solely on contract expiration.

• After the second fixed-term contract ends:
  • If the employee continues working and meets the legal conditions, they can request an open-ended contract.
  • The employer must agree unless there are valid legal grounds for termination.

• If the employer terminates without legal grounds:
• It will be considered unfair dismissal.
• The employee can request either reinstatement or compensation equal to twice the statutory severance pay.

Practical Tips for Employers:

To avoid legal risks and extra costs, employers should:

• Track contract expiration dates carefully.
• Discuss renewals with employees in advance.
• If renewing, complete the paperwork before the contract expires.
• If not renewing, and the employee continues working, terminate the contract within one month to avoid automatic renewal or open-ended obligations.

III. Validity of Non-Compete Clauses

Article 13 clarifies when non-compete clauses can be invalid, aiming to prevent employers from overusing or misusing such clauses. It sets clear limits on who can be subject to such restrictions and under what conditions. Specifically:

• If an employee does not know or have access to the employer’s trade secrets or confidential intellectual property and requests the court to declare the non-compete clause invalid, the court will support that request.
• If the scope, location, or duration of the non-compete clause is unreasonably broad compared to the confidential information the employee actually had access to, the court may declare the excessive parts invalid.

Practical Tips for Employers:

• Apply non-compete clauses only to employees who genuinely handle sensitive information, such as senior management or technical staff.
• Ensure that the restrictions are proportionate—for example, do not impose a global non-compete if your business only operates in China.
• Keep clear records of which employees have access to trade secrets.

Article 14 confirms that non-compete clauses can be valid even during employment, not just after an employee leaves. Specifically:

• Employers and employees can agree to non-compete obligations that apply while the employee is still employed.
• These clauses are valid even if no additional non-compete compensation is paid during the employment period.
• If the employee violates the clause, the employer can claim liquidated damages (if agreed in the contract) and may also ask for the return of any compensation already paid.

Practical Tips for Employers:

• Clearly define non-compete obligations in contracts.
• Include provisions for liquidated damages and the return of non-compete compensation (if any) in the event of a breach, both during and after employment.
• Regularly review and update non-compete templates to ensure they reflect the employee’s actual access to confidential information.

IV. No Voluntary Waiver of Social Insurance

According to Article 19:

• Any agreement between an employer and employee that waives the employer’s obligation to pay social insurance is invalid.
• If an employer fails to pay social insurance, and the employee resigns as a result, the employee has the right to claim statutory severance pay, and the court will support that claim.
• If the employer later makes back payments for previously missed social insurance contributions, it may request the employee to return any cash compensation that was paid in lieu of those contributions.

Practical Tip for Employers:

Paying social insurance is mandatory—the employer cannot opt out, even if the employee agrees. If the employer fails to pay, the employee can legally resign and claim severance. To avoid legal risks, employers should:

• Never accept or propose any waiver of social insurance obligations.
• Ensure timely and full contributions to all required social insurance schemes (e.g., pension, medical, unemployment, work-related injury, maternity).
• If there has been a lapse, make retroactive payments as soon as possible to reduce liability.

V. Abolishing the Old Rule on Retired Workers’ Employment Status

Previously, under Article 32 of Interpretation (I), if a person had retired and was receiving a pension, any work they did for an employer was treated as a “labor service relationship”—rather than a formal employment relationship. This meant they were not entitled to the same protections as regular employees, such as severance pay or social insurance.

Now, Article 21 of Interpretation (II) has abolished that rule.

This change aligns with a new draft regulation released on July 31, 2025, titled the Interim Regulations on the Protection of Basic Rights and Interests of Older Workers (Draft for Public Consultation) (超龄劳动者基本权益保障暂行规定（公开征求意见稿）). This draft law aims to:

• Protect older workers who continue working after retirement age.
• Require written agreements that clearly define job duties, pay, insurance, and safety protections.
• Ensure that older workers receive the same protections under PRC employment law in key areas such as working hours, overtime pay, work-related injury insurance, and minimum wage.

Practical Tip for Employers:

• Stay updated on the final version of the new regulation and any implementation rules.
• Review and revise the current agreements and internal policies for hiring or retaining workers past retirement age.
• Ensure that any post-retirement work arrangements are clearly documented and legally compliant, especially regarding compensation, insurance, and job scope.

Next Steps

Although Interpretation (II) is intended to be applied uniformly across all courts in China, local courts in different regions may interpret certain ambiguities differently. Therefore, employers should closely monitor local court practices after September 1 and stay informed of any developments.

The full Interpretation (II) (available in Chinese only) can be found here.